Not A Democracy

Hurd shares at least one trait with predecessor Fiorina: an unstinting belief in his strategy. "I'm not taking a poll here on how we're going to run the place," he says. "At a certain point you have to say, 'Here's what we're going to do.'" At the same time, HP needs to live up to the principles of its legendary founders, William Hewlett and David Packard, he says, conducting layoffs and enacting change while treating employees "with dignity and respect."

Those values will be put to the test as Hurd tries to quell board unrest in the wake of the spying case. To plug leaks around the firing of Fiorina, Dunn hired a private investigation firm that subcontracted some of the work to another company. That company solicited the phone records of board members and journalists by calling the phone company and posing as those people, a practice known as pretexting. The fallout, including the angry resignation of board member Thomas Perkins, the founder of Silicon Valley venture capital firm Kleiner Perkins Caufield & Byers, cost Dunn her position as board chair. Last week, board member George Keyworth, identified as the source of some leaks, resigned. But it's a tough loss--Keyworth was HP's longest-serving director, a former science adviser in the Reagan administration, and was considered a technical asset to HP.

HP isn't out of the woods yet. The Securities and Exchange Commission and California's attorney general are investigating whether the company broke any laws during the espionage, and the Justice Department and Congress last week got involved as well. "People will be skinned alive for this wretched pretexting," said author and management consultant Tom Peters at the InformationWeek conference. Still, users seem willing to give HP the benefit of the doubt. "They get through this board mess, and they should have some momentum," Principal CIO Scholten says.

PC Push

	Mark Hurd's 18 Tumultuous Months
	April 2005 Starts work as HP's 7th CEO, replacing Carly Fiorina, who was fired by HP's board in February
	July 2005 Announces 15,300 layoffs; hires Randy Mott as CIO
	Aug. 2006 3Q earnings soar; revenue growth puts HP on pace to surpass IBM in October as the world's largest IT company
	Sept. 2006 Elected chairman, effective in January, after chairwoman Patricia Dunn says she'll step down, the result of investigations into illicit access to board members' phone records

HP is well positioned, but it's facing steady pressure from Dell, IBM, and a newly focused Sun. In PCs, cost cutting has enabled HP to drop prices while pocketing more margin, putting the hurt on Dell. Under the rubric "the computer is personal again" --its largest PC marketing campaign ever--HP is closing in on becoming the top PC supplier. HP shipped 8.1 million PCs in the second quarter, good enough for 15% of the worldwide market, according to Gartner. Sales and profit margins reached their highest point in four years. Dell shipped 9.7 million PCs for a 17.7% share.

International Truck VP Data says Hurd told a group of CIOs at an Aug. 31 meeting in Chicago that HP's retail distribution system--long considered a liability--has helped it capitalize on surging PC demand in Asia and Eastern Europe. In the United States, HP has taken better advantage of the laptop trend than Dell, which is strong in desktop systems.

HP's printing division yields steady returns: Revenue rose 5% to $6.2 billion in the most recent quarter and supplied 48% of profits. The company is trying to expand into selling management contracts for networks of companies' printers, similar to the way hardware vendors manage PCs, as well as expand into commercial printing markets with its Indigo technology. HP's $3 billion outsourcing deal with Procter & Gamble could be a template. Also, HP's one-time laggard software and services businesses are growing profitably as well. The company has focused on consulting deals that yield the most profit, trading off some growth.

But it's the promise of products for "next-generation data centers" that has HP's business customers paying closest attention. In July, HP said it would buy Mercury Interactive for $4.5 billion, one of HP's largest acquisitions ever. Mercury is a leader in software for managing the life cycle of software development projects, but HP's ambitions are larger. Mercury owns registry software that catalogs software components that can be shared among applications in a company's IT portfolio. Oracle and BEA Systems have integrated their software with Mercury's registry, and the technology could drive demand for Web services consulting and HP's OpenView software. "This plays beautifully into my strategy," says Terri Schoenrock, executive director of service-oriented architecture in HP's consulting group.

Hurd goes even further. Buying Mercury is part of HP's plan to capture a major share of the emerging market for virtual servers and storage, in which data and logic from several applications live across common pools of machines. Earlier this month, HP shipped business servers based on Intel's Itanium chips that double the performance of those systems. HP this week will unveil SOA development labs in California, Singapore, and India, and will release a low-cost storage appliance for small companies. "You'll see a heavy blurring between what's a service and what's a product," Hurd says. He identified software for managing blade servers and storage technology as areas of interest for potential future acquisition.

By Hurd's own admission, HP's work is far from finished. "We are a company that's in transition," he says. When Hurd arrived, some managers were patting themselves on the back because HP spent 4% of revenue on IT, same as IBM. Trouble was, IBM is more profitable and efficient. "You still feel good?" Hurd says, recalling how he prodded his management team. "You want to go take a lap around the building?"

If HP reports $9 billion in net income next year, at the high end of its estimates, that still leaves $83 billion in costs, Hurd notes. With more to cut, an IT infrastructure to rebuild, and governance questions flying, no one at HP is doing victory laps yet.